We should be thankful for the economy’s liberation

Source: Live Mint, Live Mint, Live Mint

Relevance – This article analyzes the performance of economic liberalization.

Synopsis: Economic liberalisation of 1991 is viewed with Skepticism. However, we should be thankful for P.V. Narasimha Rao and Manmohan Singh for liberating the economy from the dead hand of bureaucratic control.

India Before Liberalization:

• The important sectors of the economy were reserved for the public sector, and the private sector could not invest in them even if it wanted.
• In all other sectors, private companies could make new investments, but only if they got industrial licenses from the government.
• However, these were given on a very non-transparent basis and were especially difficult for large companies, lest it increases economic dominance.
• Imports of consumer goods were completely banned, effectively insulating producers from foreign competition.
• Imports of capital and intermediate goods needed for production were allowed, but only with import licenses.

Criticism leveled against Economic Liberalisation

• First, some developing countries that retained significant state control (like China) did much better.
  • India’s HDI rank slipped from rank 114 to 131.
  • The Multidimensional Poverty Index (MPI) shows 28% of India’s population in multidimensional poverty, with another 20% vulnerable to it.
• Second, the stated goals of the 1991 reforms were higher rates of income growth with more employment generation and diversification into higher value-added activities.
  • Of these, only higher-income growth was achieved at the expense of massive environmental destruction and without enabling structural change.
  • Industrialization did not take off beyond what was already achieved before 1991.
  • Most workers remain stuck in low-paying informal work.
  • Women’s employment participation declined significantly.
  • Declining per capita calorie consumption.
• Third, Extreme crony capitalism: Big business demanded ever more incentives and next-generation ‘reforms’,
  • Only large corporations or extremely rich people were benefiting from subsidies and access to ‘cheap’ natural resources.
• Fourth, growing disparities: The non-agricultural part of the economy for the 30-year period ended 31 March 2020 grew by 7.1% per year.
  • Employment in agriculture as of 2019 still formed 42.6% of overall employment, against 63.3% in 1991.

Why the criticisms are unfounded?

Economic liberalization has resulted in increased Economic growth, Inclusive development, and improved lifestyle for Indian citizens.

• Economic growth:
  • The major objective of the reforms was to lift the economy’s growth rate, and this was achieved.
  • In the period of four decades up to the fiscal year 1990-91, the Indian economy grew by an average of 4.1% annually.
  • However, In the last 23 years, India’s economic growth averaged about 7%.
• Inclusive Development
  • Growth was not the only objective. As growth accelerated, the government  adopted a strategy of ‘inclusive growth’, to ensure that the benefits of growth also reached the poor.
  • The strategy included accelerating growth in agriculture and supporting incomes of rural wage earners through rural employment guarantee programmes.
  • The result was that agricultural growth did accelerate, and there was also greater poverty reduction.
  • Between 2004 and 2011, the last year for which data is available, about 140 million people were pulled above the poverty line.
• Conditions for most Indians have improved.
  • Per capita income went up more rapidly than before.
  • India’s overall Human Development Index (HDI) score improved from 0.433 in 1991 to 0.645 in 2019.
• Wider choices for consumers and greater economic activity.
  • In the 1990s, one could withdraw money from a bank only for a few hours during the day.
  • Now one can walk over to an ATM at any point in time.